Flip Flops after EGTRRA

[Guest Mark Draa]

Below is my take on the effect of EGTRRA on "Flip flop" plan design. I would appreciate any comments or suggestions. Thanks to the Mike & Kevin show over on PIX...

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Summary: EGTRRA takes away the override where 412 trumps 404 and originally made the Flip Flop work (Sec. 616). However, because of the increase in comp limits, 25% of 200K makes a DC [deduction] limit of $50K, so, if you design your DC at 25K annual contribution, you can still get 2 years worth of DC deductions in one year.

EGTRRA doesn't impact the ability to deduct more than one year of DB contribution in a single tax year, AND because of the ability to ALWAYS have a deferral-only 401(k), you can add $11,000 per year in deferrals to help make up for the reduction in DC contributions because of the 25% limit.

So....to do a flip-flop post-EGTRRA, you need to design your MP plan at 50% of maximum so you can fit 2 years of contribution into a single year's deduction limit (you need 2 years to make the flip-flop come out)

BUT - IN THE END, YOU'RE NOT THAT FAR AHEAD, SO THE COMPLICATION DOESN'T SEEM TO BE JUSTIFIED. SEE BELOW:

Let's look at old (start in 2001, pre-EGTRRA) vs. new (start in 2001, post-EGTRRA)

Old way: $100K DB, 35K MP

Yr 1 Deduction = $100K DB

Yr 2 Deduction = $70K MP

Yr 3 Deduction = $200K DB

Yr 4 Deduction = $70K MP

Yr 5 Deduction = $200K DB

Yr 6 Deduction = $70K MP

Total > 6yrs = $710K - OR $110K better than just 6 years of a simple $100K DB.

New way: $100K DB, $25K MP, $11K 401(k) - NOTE this is 3 plans to make it work, it used to be 2!

Yr 1 Deduction = $100K DB + $11K 401(k) = $111K Total

Yr 2 Deduction = $50K MP + $11K 401(k) = $61K Total

Yr 3 Deduction = $200K DB + $11K 401(k) = $211K Total

Yr 4 Deduction = $50K MP + $11K 401(k) = $61K Total

Yr 5 Deduction = $200K DB + $11K 401(k) = $211K Total

Yr 6 Deduction = $50K MP + $11K 401(k) = $61K Total

Total > 6 yrs = $716K, or $116K better than 6 yrs of a simple $100K DB, and $6K better than before EGTRRA. Because of the extra plan required, I don't think this justifies the extra administrative cost and complexity. The chances of screwing it up in some fashion over the lifetime of the plan has got to be better than even!

Note, without the 401(k) addon, the total is $650K or only $50K better than a simple DB, and $60K worse than before EGTRRA.

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Thanks!